What do you look for in a cheap loan? More importantly, how do you increase your chances of qualifying for a cheap loan? If you asked this question to any loans officer out there, they would probably start by advising to keep watch of your credit rating. Granted, however, the financial sector isn’t short of cheap loans and other highly affordable credit services. For instance, certain types of loans like secured personal loans and homeowner loans, typically come with the lowest APR rate. It is important to note that most of these are either secured loan products or unsecured but exclusive to borrowers with excellent credit scores and solid sources of income.
Simply put, the healthier your financial standing is in the eyes of the lender, the lower your interest rate. In this guide, we will be helping you understand how to identify cheap loan providers and what you need to qualify for the loans. We also look at how cheap loans work as well as the advantages and possible disadvantages of applying for such loans. In addition to this, we will give you a list of what we consider the Best Cheap Loans UK in 2021.
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Our Featured Business Loans Provider for 2020
- Offers loans of between £1,000 and £25,000
- Advertised APR interest rate of 7.4%
- Loan terms of between 1 - 10 years
How do Cheap Loans work? Read our step-by-step guide
The loan application process and the loan requirements will in most cases vary from lender to another or based on the type of loan. For instance, the process of obtaining a cheap homeowner loan will likely to differ significantly from a car financing loan. If you are looking to get the very best rates without putting your assets up as collateral, then you will be best off applying for an unsecured personal loan. You, however, need to ensure you have a stellar credit score and low debt to income ratio when applying if you hope to boost your chances of qualifying for the loan.
That said, here is the process of applying for a cheap loan.
Step 1: Find a cheap loan provider
Wen looking for a cheap loan service provider, you are simply looking for the lender with not just the lowest APR rate but also the most favorable loan terms. And the industry isn’t short of lenders with highly competitive interest rates for creditworthy citizens. To get you started, we share with you a list of the best cheap loan providers in the UK below.
Step 2: Start the application
After identifying a cheap loan provider and verifying that they are adequately registered, regulated, and insured, head over to the institutions website and start the loan application process. Most of these will have online calculators where you can enter the size of the loan you require and your preferred loan term. For example, if you seek to borrow £10,000 over the course of 3 years, this is what you need to enter. Take note, although the loan provider might approve your application, they could still offer you less than what you initially applied for.
Step 3: Enter your personal and financial information
During the application process, you will be asked a plethora of questions aimed at verifying your identity and assessing your current financial standing. The lender will require you to furnish them with such personal information as your name, address, date of birth, driver’s license number, and contact details. When it comes to your financial standing, you will initially need to provide information about your income.
On top of your annual salary, you will also need to enter the name and address of your employer, your employment status (full-time, part-time, etc.), and the frequency at which you receive your salary. The cheap loan provider will also need to be made aware of any other debt obligations that you currently have outstanding. This includes the name of the debt provider, as well as an estimation of the amount currently owed.
Step 4: View your pre-approval rates
If your cheap loan application was successful, you should receive a loan pre-approval application response within a few minutes. As such, you should now be able to view your loan terms. This will include the APR rate that the lender is happy to offer you, and when you will be required to make your repayments. The loan agreement will also list possible additional charges – if applicable, such as an origination fee and penalties and fines for late/missed payments.
If you’re satisfied with the loan terms, simply sign the loan agreement and proceed to the next step. If you however fail to qualify for an unsecured personal loan, you can always apply for a secured personal line with your car or home as collateral. Be cautious however with the number of applications you make within a specific time as multiple hard credit report checks by different lenders have the effect of pushing down your credit score – albeit temporarily .
Step 5: Enter your bank account details & set-up a direct debit agreement
Once you have signed your digital loan agreement, there is one more stage to the application process that needs to be completed before the lender transfers the funds. Firstly, you will need to enter your bank account details. This is the account that you wish the lender to transfer the loan funds into. You also have to decide whether you the lender to automatically deduct the monthly installments from your bank account or not. Keep in mind that you stand to benefit from an even lower interest rate if you agree to the automated installment payment.
Best 3 cheap loan providers
If you’re looking for a loan with the lowest rate of interest possible, then you will need to meet some minimum eligibility requirements. These include a good to excellent credit score, a history of always repaying your debts back on time, and a reasonably good annual income. Other factors determining the loan interest rate include whether you are a homeowner or have a vehicle registered in your name and both work towards boosting the competitiveness of the APR rates.
Here is the list of what we consider the best cheap loan providers in the UK and the criteria used to rank them.
Criteria used to rank the best cheap loan providers
- Lenders with the most competitive interest rates
- How much the lender is able to offer
- What credit score you need to obtain the personal loan
- What loan terms are available
- What the late payment and missed payment process is
1. HSBC – Best if your credit score is excellent
If you have an excellent credit score, you stand a very good chance of obtaining an unsecured HSBC personal loan at super competitive rates. Here the rates start from 3.3% APR based on your creditworthiness and loan amounts.
The lender is famed for its fast loan application processing and approval that averages 72 hours. Additionally, you stand to benefit from relatively high loan maximums where the lender is open to lending between £1,000 and of £25,000. Moreover, you can borrow the funds for a minimum term of 12 months, up to a maximum of 5 years. As is standard in the online lending space, the longer the loan repayment period, the higher the APR and viceversa.
What we also like about the cheap loans currently being offered by HSBC is that you will not be penalized for overpayments and prepayments. This allows you to pay off your loan early effectively reducing the overall cost of the loan.
- Personal loans of between £1,000 and £25,000
- No financial penalty for making overpayments
- Perfect for those an excellent credit score
- Only available to individuals with stellar credit scores
- One may consider their £25,000 loan limit quite low
2. Admiral – Very competitive APR rates for loans of less than £25,000
Much like in the case of HSBC, Admiral is also offering some amazing rates for its unsecured personal loans. To qualify for a loan here, you must have an excellent credit score as well as a good track record when it comes to repaying your debts. Moreover, Admiral will only lend to individuals that have a minimum income of £10,000 per year, although this is judged on a case-by-case basis.
Nevertheless, if you meet the required credentials, then you can obtain a cheap loan at just 3.9% APR. In order to get this rate, you will need to be borrowing the full £25,000. If you don't need this much, then you'll pay a slightly higher rate. You can borrow the funds from Admiral for a minimum term of 12 months, up to a maximum of 5 years. Additionally, you can complete the entire loan application online on the Admiral website or via their mobile banking app, and you should receive an instant decision once you supply the required information.
- Personal loans of up to £1, 000 and £25,000
- Perfect for borrowers with an excellent credit score
- Maximum loan term of 5 years
- You will not always qualify for the maximum loan amount
- Not suitable for bad credit borrowers
3. Sainsbury's Bank – Best APR rates for loans of £25,000 or more
If the £25,000 maximum loan limit offered by HSBC and Admiral doesn't quite cover what you need, then we would suggest checking out Sainsbury's Bank that provides loans of between £1,000 and £40,000. The bank, however, maintains some of the most volatile interest rates that depend on such factors as whether you are an existing bank member, creditworthiness and minimum annual incomes.
These range from 3.9% APR to 6.7% APR per annum. While Admiral rates may seem higher than the other two cheap loan providers we have discussed thus far, you need to factor in the fact that Sainbury maintains one of the highest maximum loan limits for unsecured loans. In addition to the high maximum loan limits, we are also drawn to the fact that Sainsbury maintains some of the most extended loan repayment periods. Here you can choose to repay your within a period of between 12 months and 7 years.
These two factors explain the relatively high interest rates charged by Sainsbury given that extended loan repayment periods are almost always associated with a higher APR. And most importantly, Salisbury also comes off as one of the few lenders that give their borrowers a grace period of two months before they can start repaying the loan.
- Best rate of 6.7% APR on loans of £40,000 over 5 years
- Maximum loan term of 7 years
- Personal loans of up to £40,000
- You will not always qualify for the £40,000 maximum loan limit
- One might consider their interest rate expensive
Am I eligible for a Cheap Loan?
Here, we look at all the factors different cheap loan service providers look at when determining the interest rate to be charged on loans:
- Credit Score: In order to qualify for the most affordable loan deals in the UK, you will need a good to excellent credit score. In fact, lenders have the capacity to pull this up with ease, so it’s usually the first thing that they will look at. If you have previously fallen behind on debt obligations, or you are still somewhat new to credit, then you probably won’t have a high enough credit score to get a cheap loan.
- Annual Income: The cheapest loan deals are also reserved for borrowers with a solid and reliable source of income. While lenders such as Admiral might state that you only need to be earning £10,000 per year to qualify for a loan, it is highly unlikely that you will benefit from their coveted APR rates if you the lender isn’t confident about your ability to fund your lifestyle and leave enough for debt repayment with your salary. Note that your specific APR rates are based on the lender’s perceived risk levels, so a higher income illustrates that you can afford to meet your repayments.
- Other Debts: Just because you have a good or excellent credit score – alongside an above-average annual income, this doesn’t mean that you are guaranteed to get the best loan deals. Instead, lenders will also need to look at what other debt obligations you currently have outstanding. For example, if you are currently holding heaps of credit cards, alongside a number of other loans and a mortgage, the lender might consider you a high risk borrower and deny you the cheap loan regardless of your credit score.
- Previous Credit: In going through your credit report the lender will also be looking at such other factors as your loan repayment history, whether you have had your loans enter into repossession or if you have ever filed for bankruptcy. And you will need a clean slate if you are to qualify for a loan that carries the most affordable rates. If you on the other hand have a checkered past when it comes to loan repayment, you will either be locked out of the loan process or only qualify for high interest rate loans.
What happens if I fall behind on my cheap loan repayments?
In most cases, you will only succeed in qualifying for a cheap loan at the most competitive APR rate with your preferred lender if you have an untainted loan repayment history, a good to excellent credit score and a reliable source of income. However, life has its unpredictable twists and turns, implying that there is always the chance that you could fall behind on your repayments. If you do, then there is likely to be a number of consequences that you need to give a serious thought to:
If you are late on a single loan repayment, most lenders maintain the monthly installment grace period of between one and two weeks. For example, let’s say that your cheap loan agreement comes with a monthly repayment date of the 7th, at a fixed amount of £278. If there was a problem taking the payment from your bank account on the 7th, but you made a manual payment within a week or two, the late pay will have no impact on your credit score and neither will you incur ate payment penalties.
If you fail to cover the late payment and the grace period lapses, your late payment is now considered a missed payment. And this has two main ramifications. First, the lender will likely report the missed payment to one, or all of the main three credit bureaus – a move that effectively hurts your credit score and chances of qualifying for an affordable loan in future. Secondly, you will likely be hit with a missed payment penalty that pushes up the cost of loan.
If your missed payment turns into multiple missed payments, then you face the very serious risk of seeing your account go into default. In layman terms, this means that the lender will likely initiate legal actions aimed at recovering their funds. If the loan is secured, the lender has a right to auction the security asset to cover the loan amounts. The default will also greatly affect your credibility in the face of lenders in the future and dim your chances of qualifying for affordable loans.
Our Featured Business Loans Provider for 2020
- Offers loans of between £1,000 and £25,000
- Advertised APR interest rate of 7.4%
- Loan terms of between 1 - 10 years
Glossary of loan terms
A credit score shows your creditworthiness. It's primarily based on how much money you owe to loan or credit card companies, if you have ever missed payments or if you have ever defaulted on a loan.
Guaranteed Approval is when, no matter how bad, your credit score its, your loan application will not get declined.
A Credit Limit is the highest amont of credit a lender will lend to the borrower.
Collateral is when you put up an item against your loan such as your house or car. These can be repossessed if you miss payments.
A Cash Advance is a short-term loan that has steep interest rates and fees.
Your Credit Rating is how likely you are to fulfill your loan payments and how risky you are as a borrower.
Fixed Interest Rate is when the interest rate of your loan will not change over the period you are paying off you loan.
The Interest is a percentage based on the amount of your loan that you pay back to the lender for using their money
If you default on your loan it means you are unable to keep up with your payments and no longer pay back your loan.
If you miss a payment the lender will charge you for being late, this is known as a late fee.
An Unsecured Personal Loan is when you have a loan based solely on your creditworthliness without using collateral.
A Secured Loan is when you put collateral such as your house or car up against the amount you're borrowing.
This is the Interest Rate used by banks for borrowers with good credit scores.
The Principal amount the borrower owes the lender, not including any interest or fees.
A Variable Rate is when the interest rate of you loan will change with inflation. Sometimes this will lower your interest rate, but other times it will increase.
An Installment Loan is a loan that is paid back bi-weekly or monthly over the period in which the loan is borrowed for.
A Bridge Loan is a short term loand that can last from 2 weeks up to 3 years dependant on lender.
Having an AAA Credit Rating is the highest rating you can have.
A Guarantor co-signs on a loan stating the borrower is able to make the payments, but if they miss any or default the Guarantor will have to pay.
LIBOR is the London Inter-Bank Offered Rate which is the benchmarker for the interest rates in London. It is an average of the estimates interest rates given by different banks based on what they feel would be the best interest rate for future loans.
Home Equity Loans is where you borrow the equity from your property and pay it back with interest and fees over an agreed time period with the lender.
Debt Consolidation is when you take out one loans to pay off all others. This leads to one monthly payment, usually with a lower interest rate.
If you obtain a Student Loan to pay your way through College then you loan is held with the Department for Education U.K.
Financial Aid in the form of grants is funding available to post-secondary education students throughout the United Kingdom and you are not required to pay grant
What is a cheap loan?
A cheap loan refers to a loan that comes with a very low rate of interest. In fact, the APR rate is likely to be the lowest rate that the lender is able to offer.
What credit score do I need to get a cheap loan?
If you're looking to get industry-leading interest rates on your loan, then you will likely need to have at least a 'good' credit score. Some lenders go one step further, subsequently requiring you to sit within the 'excellent' threshold.
Do I need to obtain a secured loan to get the cheapest rates?
What is the lowest interest rate that I can get on a cheap loan?
This depends on a number of key factors, such as how much you borrow and for how long, as well as your current financial standing. However, if opting for a conventional personal loan, you should be able to get your APR rate down to the 3 - 3.5% mark.